We estimate using ETFs rather than the traditional approach of holding individual stocks offers a cost advantage of 5–8 bps in large and mid-cap equities.
Currently, Mutual Funds have ~$0.5 trillion invested in ETFs, much of which is used for liquidity management. However, looking beyond 2019, the emerging use of passive vehicles as an integral part of an active fund management strategy will be arguably the more significant dynamic. According to the Morgan Stanley and Oliver Wyman 2017 report, Mutual Funds are now using ETFs to reduce their own costs and “Asset allocators such as Outsourced Chief Investment Officers (OCIO) and Wealth Managers will account for a large proportion of this incremental demand as they increasingly use ETFs at near zero cost to source Beta exposure, allowing them to focus their resources on high conviction managers or more complex alternative investments. ETFs’ market share in the US market alone is likely to increase from 15% to 40–60% during 2017–2027. Investors moved money from Mutual Funds and into ETFs during 2014–2017 and that has forced Mutual Funds to reduce their fees. This article states that:Īccording to a March 2017 report by Morgan Stanley and Oliver Wyman, ETFs could gain an additional US$2 trillion to US$3 trillion in assets during 2017–2022.ĮTFs are deemed to be typically cheaper and more transparent than Mutual Funds, and Mutual Funds have struggled to achieve performance in recent years (in most instances, disclosed calculated fees don’t include non-disclosed “costs” such as re-balancing costs, monitoring costs of both ETF-managers and investors, and ETF-arbitrage costs). “ There could be a US$3 trillion shift in investing, and it poses a huge problem for mutual funds”. The net effects are that: (i) the companies and commodities in these indices are overvalued and enjoy artificial price support (from these ETFs and index funds) (ii) there is substantial over-investment and “Gambling” in the underlying companies and under-investment in non-listed, micro-cap, small-cap and emerging markets companies, which affects economic growth, development and capital mobility and (iii) these indices, index funds and ETF and their component companies pose increasing systemic risk and financial instability threats. The major problem is that more than US$3.5 trillion is invested in indices through ETFs, index funds and equity swaps apparently without regard to the quality and valuation of the underlying companies and commodities.
The relatively sudden and significant growth of indices, passive/active ETFs and index funds during 1995–2018 (combined with the Internet, increasing volume of cross-border transactions, and improved global settlement/clearing systems) have increased the potential for systemic risk, financial instability and the failure of regulations. As of 2018, there were more indices in the world than the number of exchange-traded companies. Indices, index funds and exchange-traded funds (ETFs) have become major asset classes in debt, equity, real estate, currency and commodity markets worldwide-and their management, maintenance and use often occurs within the context of human–computer interactions (HCI).
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